As turnaround advisors, we’ve met with a number of business owners over the past fortnight contemplating permanent closure as a result of the COVID-19 crisis.
These are companies across retail, hospitality and beyond which have seen revenue fall off a cliff and are burdened with pre-crisis debt.
To them, the government’s subsidies barely scratch the surface.
We fear this line of thinking will result in the closure of thousands of otherwise sustainable businesses, and the loss of tens of thousands of jobs, without directors and management fully assessing all options.
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Our message to SME business owners: don’t pull the trigger too soon.
What support is on hand?
However, it is the legislative changes to recovery action (in other words, enforcement on debts) that has flown under the radar. These are changes in law designed by the government to allow a business to tread water while negotiating with its creditors, even if no money is coming in the door.
This includes a temporary relief from statutory demands, where companies now have six months instead of the traditional 21 days to respond to a creditor. The threshold to issue a statutory demand has also been increased from $2,000 to $20,000. Furthermore, there is relief from directors’ personal liability from insolvent trading for the next six months.
In other words, business owners have been given the most important tool when navigating financial distress: time.
The ‘hibernation’ strategy
The term was coined by the Prime Minister to describe temporary business closure as a result of government health policy. Broadly speaking, this involves the cessation of operations without boards and management resorting to insolvency (which is typically permanent).
While dependent on specific circumstances, this strategy can include:
- Ceasing all cash outflows while the business is unable to trade;
- Getting staff onto JobKeeper to ‘keep the team together’; and
- Negotiating with key creditors to obtain a moratorium on debt repayments.
Notably, even if not all stakeholders agree to repayment terms, the enforcement remedies available to creditors have been deliberately relaxed by the government for six months.
This ‘hibernation’ strategy allows directors time to stop, take a breath, and develop a ‘reboot plan’ for when things invariably turnaround.
Our overarching message to business owners is not to panic.
While the situation is unprecedented, so are the legislative changes to protect businesses. Use the next two or three months to plan for an economic reboot.
Be ready for big changes in how we all do business, but don’t pull the trigger too early.